Hollande's 75% 'Supertax' Failure A Blow To Piketty's Economics

France has said goodbye to its infamous 75% income tax on individuals earning more than 1 million euros this past weekend, returning to a top marginal income tax rate of 45%. The change, effective February 1, is a blow to the French Socialist party’s signature redistribution measure, the same remedy supported by popular French economist Thomas Piketty who predicted that “lots of other countries will inevitably follow this route.” To be precise, Piketty and his frequent co-author Emmanuel Saez recently argued for an even higher 80% levy on high earner income in an op-ed for The Guardian.

Most memorably, the French supertax famously compelled French actor Gerard Depardieu to become a Russian citizen and relocate to Moscow for tax reasons. Notwithstanding, this trend of emigration persisted at the macro level as an estimated 2.5 million French citizens now live abroad in the U.K., Belgium and other countries sporting more competitive income tax rates.

As a result of a reduced labor supply and discouraged investment in France following the 75% top marginal income tax rate announced in September 2012, French revenues for 2013 came in at only 16 billion euros, a 14 billion euro shortfall below the French government’s expected 30 billion in tax collections.

Compared to initial estimates from the French government using models which ignore the Laffer Curve’s “slippery slope,” tax revenues from corporate taxes, individual income tax, and value-added tax (VAT) were down by 6.4 billion, 4.9 billion, and 5 billion euros respectively.

In 2014, the French economy continued its stagnation as the economy has failed to post a single quarter of annualized GDP growth above 0.8% since Hollande took office in 2012 and implemented his 75% supertax shortly after. France’s unemployment rate still sits around 10%. The French government also conceded that the country will most likely fail to meet its deficit target of 3.8% of GDP in 2014 and may not do so until 2017 with tax revenues projected to continue their decline.

France’s 75% ‘supertax’ illustrates the effects of the Laffer curve

The French 'supertax' perfectly illustrates the Laffer curve’s depiction of diminishing government revenues at high tax rates. Piketty and his co-authors have forgotten the power of an old idea, which recently turned 40 as Heritage Foundation chief economist Stephen Moore observed in The Washington Post.

France’s experience with its 75% supertax and declining tax revenues also confirms recent research on the Laffer curve by Federal Reserve Bank of St. Louis and Georgetown economists that estimates the tipping point where higher tax rates cause declining tax revenues begins at a 52% marginal tax rate. Another recent paper by University of Chicago professor Harald Uhlig and Federal Reserve Board of Governors economist Mathias Trabandt estimate this critical tax rate lies somewhere in the 50-65% range for European countries including France.

With the 75% supertax scrapped, the top marginal income tax rate in France will now be 45%. Indeed, France will now return to the tax rates of former French President Nicolas Sarkozy, Holland’s predecessor, who had established a tax ceiling of 50% of earnings.

France also enforces a Piketty supported wealth tax on French residents and non-residents who have assets in France. French economist Eric Pichet in a recent academic paper has found evidence of capital flight as a consequence of the French wealth tax, namely, that it has cut French GDP growth by 0.2% per year. The paper suggests that when an individual country implements a wealth tax, it incentivizes people to stash their wealth in tax havens and invest abroad.

Similarly, University of Toronto economist David Seim in a recent paper finds that Sweden’s wealth tax, which was abolished in 2007, spurred significant tax evasion and capital flight as well.

More constructive policies that reduce inequality and promote economic growth

This past week, Berkeley Professor Emmanuel Saez updated his famous income inequality graph showing top 1% pre-tax incomes surging since 1970, which has drawn a number of headlines, including an in-depth article from The Upshot at The New York Times by Justin Wolfers.

A growing number of conservatives, in addition to liberals, have begun to address inequality in a serious tone taking an approach to resolve the issue by building up the poor and middle-class rather than an approach focused on thwarting the wealthy embodied in France's 75% 'supertax'. Constructive “bottom-up” policies that can improve outcomes for the bottom 99% include expanding the Earned Income Tax Credit (EITC) and encouraging stock ownership.

Improvements streamlining auto-enrollment in retirement plans, increased use of incentive pay plans enabling employees to share in company profits, and reduced taxes for employee stock ownership plans are all examples that would increase capital income for the bottom 99%.

Bill Gates has even weighed in on Piketty's thesis, suggesting that policymakers instead move away from income, wealth, and capital gains taxes in favor of progressive consumption taxes to avoid penalizing wealthy individuals who are focused on philanthropy and investment in the economy.

The U.S. and other advanced economies should take note that trying to thwart the wealthy like France did with its top-down 75% supertax has failed and that the real path to reducing inequality lies in creating bottom-up pro-growth strategies.